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Smoke clearing on pot tax bucks

How much money Oregon will take in if voters choose Nov. 4 to legalize marijuana?

A panel determined this week that the official financial estimate will be between $17 million and $40 million annually, once start-up costs are taken care of in the first few years.

More than 1 million voters will see that estimate, both in the state voters pamphlet and online voters guide, when they consider the fate of Measure 91.

"But this is such a speculative estimate to begin with," says Michael Jordan, director of the Oregon Department of Administrative Services and a member of the panel.

The panel combined the low-end estimate offered by the Legislative Revenue Office with the high-end estimate in a report by the Portland firm ECONorthwest, which prepared it for Measure 91 advocates.

All are based to some degree on data from Colorado, which began retail sales of the drug at the start of this year. Washington, where voters also legalized recreational use of marijuana in 2012, began retail sales July 8.

The panel, led by Secretary of State Kate Brown, had tentatively chosen the lowest of the estimates, which pegs the first-year yield at just $9.3 million after start-up and operational costs are deducted. In the first full two-year budget cycle in 2017-19, it projects $40 million, and in subsequent years, between $17 million and $26 million annually.

Still, says Mazen Malik, senior economist for the Legislative Revenue Office who prepared the estimate, in the long term, you would expect marijuana to bring in a higher amount of revenue.

State Treasurer Ted Wheeler says that estimate, though based on sound assumptions, is too conservative.

"I think it's a mistake to disregard some of the higher estimates in the ECONorthwest report," he says.

According to that report, it projects the first-year amount at $38.5 million  and $78.7 million for the 2017-19 budget cycle.

Jim Bucholz, director of the Oregon Department of Revenue, went along with the panel's final figures. But the Legislative Revenue Office, he says, "is the only one who is completely neutral."

A third estimate was offered by Beau Whitney, an independent economist who teaches at the University of Phoenix and has his own consulting business in Portland. His first-year range is between $9.1 million and $21.2 million, but the subsequent two-year cycle at between $22.2 million and $46.6 million.

"I am trying to create a simple forecast that people can understand," says Whitney, who has done contract work for businesses such as Intel Corp. "I do not have a dog in this fight."

Figuring finances

Oregons Measure 91 leaves many details to the Oregon Liquor Control Commission, which would have the authority to regulate and tax marijuana, sales of which could start in mid-2016.

After OLCC start-up and operating expenses, which are estimated at $3.8 million overall for 2015-18 and $3.2 million annually afterward, revenues are divided among state agencies based on a formula in the measure.

Beneficiaries, in descending order, are the Common School Fund, 40 percent; mental health alcoholism and drug services account, which goes largely to counties, 20 percent; Oregon State Police, 15 percent; city law enforcement, 10 percent; county law enforcement, 10 percent; Oregon Health Authority, also for treatment and prevention, 5 percent.

Oregon's proposed tax, based on weight, differs from Colorado's and Washington's.

The Oregon measure would impose an average tax of $28 per ounce  $35 per ounce of flowers (buds), $10 per ounce of leaves, and $5 per immature plant. Increases are linked to the Consumer Price Index.

Washington taxes 25 percent on wholesale transactions by producers and processors to retailers, and on retail sales to consumers. Colorado taxes 15 percent of the value of plant material  values are set annually  and there is a 10 percent retail sales tax.

Johnson, the chief sponsor of Oregon's measure, says the differences are deliberate.

"We feel we have come up with a great model to pull as many people into the regulated market and out of the black market," he says. "We want to encourage people to come into the light of day and generate millions for the state."

Shift from black market

The estimates differ largely on which assumption is chosen for conversion of marijuana buyers from the black market to a legal market.

The ECONorthwest report figures it will be close to 40 percent.

We determined that more than 20 percent of the black market would go to the legal market, says Robert Whelan, a senior economist for the Portland firm. He also says legalization would attract first-time buyers, particularly older people with no ready access to the drug.

A 2013 Oregon State University estimate by Sean Crawford pegs the share of current users who would switch to a legal market at 40 percent, about 110,000 of the 260,000 who are age 21 and older. Users between 18 and 21 were excluded; they still could not possess or use marijuana legally.

The report assumes that each of those 110,000 current users would buy 6.75 ounces per year, and 90,000 new entrants, one ounce each per year.

This is a difficult market to analyze because its hidden, Whelan says.

Based on a 2009 study by the Rand Corp., which projected that retail prices in California would drop by 80 percent under a proposed legalization measure, Whelan says Oregons projected price of marijuana per ounce would drop about 20 percent from $177 to $145. (California voters rejected legalization in 2010.)

Whelan says despite such a drop, the Napa Valley of marijuana is the Medford-Grants Pass area, referring to Southern Oregon, where much of Oregons currently illicit crop is produced outdoors.

Differing assumptions

But under Malik's assumption, only a third of current users would enter the legal market  and the price would not drop as much as envisioned in the ECONorthwest report.

The legal stuff is not necessarily cheaper than the not-legal stuff, he says. You would have movement in the price in an illicit market, but it would be smaller."

Malik, who works for the office that advises lawmakers about tax measures, says cultivators and retail sellers of marijuana still would be subject to all the employee taxes and property and utility costs of other businesses. Unlike those businesses, however, Malik says marijuana-related businesses cannot deduct their operating costs before paying federal taxes.

Still, he says, as growers got more efficient and police cracked down on unlicensed operations other than self-cultivators allowed under the law, prices could come down more.

Paul Warner, who leads the Legislative Revenue Office, says a more detailed study is forthcoming.

Whitney, the independent economist, projects a shift of 50 percent of current users to the legal market, more than the other estimates. But he also says consumption will average 2 ounces per year, based on Colorado data, far less than assumed in the ECONorthwest report.

Malik says he assumes an 8 percent rate of self-cultivators, higher than the 3 percent rate assumed in the ECONorthwest report. Growing your own is an option in Colorado, which allows six plants, and under Oregon's measure, which allows four, but it is barred in Washington.

Other factors

As for Colorado, where up to 50 percent and more of proceeds from early retail marijuana sales have come from out-of-state tourists, Malik says Oregon should not expect such a large share given policies in neighboring states.

The ECONorthwest report assumes a 32 percent share from tourists.

Oregon was the first state in 1973 to decriminalize possession of less than one ounce of marijuana; California followed suit in 1975. The maximum fine is Oregon is $1,000, although the fee for marijuana diversion is $335.

Marijuana for medicinal purposes became legal in all three West Coast states in the 1990s; California was first in 1996.

Of Oregon's four neighbors, only Idaho does not have decriminalization or medical marijuana laws. Of Colorado's seven neighbors, only two have medical marijuana laws and one a decriminalization law.

None of the Oregon estimates takes into account medical marijuana or changes in law enforcement costs.

"No matter which estimate you look at, this measure will be a definite revenue generator for the state," says Johnson, Measure 91's chief sponsor.

"It will also save resources and time for law enforcement and the judiciary and will better allocate them to combat more serious and violent crimes."

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